11. INCOME TAX EXPENSE (BENEFIT)

12 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

11. INCOME TAX EXPENSE (BENEFIT)

NOTE 11 INCOME TAX EXPENSE (BENEFIT):

The components of income tax expense (benefit) for the years ended December 31, are as follows:

(Dollars are in thousands)		2016		2015
Current expense (benefit)	$	(7)	$	19
Deferred tax expense (benefit)	(2)		-
Net income tax expense (benefit)	$	(9)	$	19

The net deferred tax assets and liabilities resulting from temporary differences as of December 31 are summarized as follows:

(Dollars are in thousands)	2016			2015
Deferred Tax Assets
Allowance for loan losses	$	2,064	$	2,548
Deferred compensation	147		148
Accrued employee benefits	15		82
Nonaccrual loan interest	896		737
Other real estate owned	1,911		2,214
Repossessed assets	12		-
Amortization of core deposits	101		119
Amortization of goodwill	514		607
Capitalized interest and repair expense	41		43
Net operating loss carryforward	5,648		5,150
AMT carryforward	320		305
Unrealized loss on securities available for sale	235		169
Total Assets, gross	11,904			12,122
Valuation allowance	(5,317)			(5,655)
Total Assets, net	6,587			6,467
Deferred Tax Liabilities
Accelerated depreciation	867		959
Prepaid expenses	38		44
Deferred loan costs	397		343
Total Liabilities, gross	1,302			1,346
Net Deferred Tax Asset	$	5,285	$	5,121

The following table summarizes the differences between the actual income tax expense and the amounts computed using the federal statutory tax rate of 34%:

(Dollars are in thousands)		2016		2015
Income tax expense (benefit) at the applicable federal rate	$	323	$	912
Permanent differences resulting from:
Nondeductible expenses		7		7
Tax exempt interest income		(44)		(44)
State income taxes less federal tax effect		5		(13)
Bank owned life insurance		(57)		(42)
Deferred tax valuation allowance change, net		(338)		(735)
Other adjustments		95		(66)
Income tax expense (benefit)	$	(9)	$	19

Management reviewed the December 31, 2016 deferred tax calculation to determine the need for a valuation allowance. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection and the effects of off-setting deferred tax liabilities, it is more likely than not that all the deferred tax assets, net of the $5.3 million allowance, would be realizable. Management is required to consider all evidence, both positive and negative in making this determination. As of December 31, 2016, the Company had $16.6 million of net operating loss carryforwards which will expire in 2031 thru 2036. Management expects to utilize all of these carryforwards prior to expiration. Direct charge-offs contributed to a reduction of the tax asset and are permitted as tax deductions. In addition, writedowns on other real estate owned property are expensed for book purposes but are not deductible for tax purposes until disposition of the property. Goodwill expense also was realized for book purposes in 2011 but continues to only be tax deductible based on the statutory requirements; thus, creating a deferred tax asset. When, and if, taxable income increases in the future and during the net operating loss carryforward period, this valuation allowance may be reversed and used to decrease tax obligations in the future. We do not have significant nontaxable income or nondeductible expenses.

The Company’s tax filings for years ended 2013 through 2016 were at year end 2016 open to audit under statutes of limitations by the Internal Revenue Service (“IRS”) and state taxing authorities. Our tax filings for the years ended 2010, 2011, and 2012 had been under examination by the IRS. In March 2015 we received notification from the IRS that as a result of the examination no changes were made to our reported tax.